Contracts are necessary in today’s world, but the difference between simple contracts and formal contracts can be confusing. Not having a contract that’s appropriate for the situation can lead to misunderstandings or even being exploited. If you don’t own or operate a business, it’s easy to think that you may not have much need for contracts in your life. However, they are used for everything, from signing up for a library card to opening bank accounts to real estate transactions.
Understanding how and why contracts are used, as well as the different kinds of contracts, can ensure you are protected in your business and legal transactions, whether it’s in your professional life, renovating your home, or engaging in other personal or business dealings. A business law attorney can be invaluable in this process, helping you draft, review, and enforce contracts that safeguard your interests.
What Is a Contract?
A contract is an agreement that defines expectations and obligations between two or more people or parties. However, not all contracts are legally binding. If a contract does not meet the following conditions, it may not be valid:
- A clear, definite offer made with the intent of creating a binding contract
- Acceptance of the offer
- Consideration, wherein both sides agree to give up something of value in exchange for something else of value
- No illegal terms or requests
- Capacity of all parties to enter the contract
- Mutual assent, wherein all parties agree on the terms laid out in the contract
Kinds of Contracts
When we think of contracts, most imagine multi-page documents, such as a mortgage agreement. However, there’s actually a wide variety of contracts. If an agreement meets the criteria above, it may be legally binding. Two important distinctions are simple, also called informal, contracts and formal contracts.
Simple Contracts
Simple or informal contracts don’t necessarily follow a prescribed process. They might be written or oral but if they meet all the conditions of a contract, they are legally binding. Simple contracts are often used in casual transactions. They use very few legal terms and are created without consulting a lawyer. For example, a verbal agreement to split the cost of a vacation is an informal contract.
Formal Contracts
Formal contracts are usually written in a structured way, using precise legal or technical terms, and often have specific requirements. These are employed in official transactions, like business and legal agreements, to protect all parties in foreseeable circumstances. Larger businesses and government entities almost always have contracts written by lawyers or with extensive legal input. You need a Business Lawyer to ensure that contracts are legally sound, fair, and protect your interests.
Difference Between Simple Contracts and Formal Contracts
When all parties in a contract do as they agreed, there’s usually no issue. The problem comes when one or more parties don’t meet the expectations of others involved in the contract. In terms of providing protection for all parties, there are some key differences between simple contracts and formal contracts.
- Complexity – A simple contract usually covers the general intent of the offer, but it usually won’t outline how to handle a dispute and measures for any recourse. In contrast, a formal contract will have detailed explanations of what is expected from all parties, including timelines, terms of payment, method of delivery, and more.
- Protection – Simple contracts often leave a lot of room for interpretation, whereas a formal contract’s main function is to provide protection for all parties. As such, when writing a formal contract, there’s an attempt to anticipate conflicts and have pre-determined contingencies to address them if they occur.
- Enforcement – It can be difficult to enforce simple contracts if they don’t account for all the details of an agreement. This is especially the case when the contract is verbal. Because formal contracts center around details, they are often easier to enforce if the dispute requires legal intervention.
- Use – Formal contracts are standard in complex business and legal transactions where substantial investment is at risk. They are even common in smaller interactions because there is more potential for misunderstandings. Simple contracts are more often used between parties that already know and trust each other or where the terms are more limited and straightforward.
- Process – Simple contracts are often created quickly, even in the spur of the moment, by the parties involved. Formal contracts normally require several drafts, detailed review by legal professionals, negotiations on the terms, and signatures from all parties.
FAQs
Can a Text Message or Email Exchange Be a Contract?
Yes, a text message or email exchange can be legally binding if it meets all the criteria of a legal contract. However, if any part of the criteria is missing, it may lead to legal disputes if there are problems between parties. In critical matters, it is ideal to construct a formal agreement with the aid of an attorney.
If a Simple Contract Is Signed, Does That Make It Legally Binding?
Even if a simple contract is written and signed, it does not necessarily mean it is legally binding. Signatures show that all parties agree to the terms. However, if the terms are not clear and specific, it can lead to misunderstandings about how the contract is to be carried out.
Who Can Enter Into a Contract?
Contracts are only binding when all parties have the capacity to enter into a contract. This means they must be 18 or over, have the appropriate mental capacity, and are not intoxicated by drugs or alcohol. The requirements for “mental capacity” differ from state to state. A lawyer can address any specific concerns about capacity when entering a contract.
What Happens If There’s a Dispute Over a Contract?
If there’s a dispute over a contract, the first step is to read the contract and contact the other party about the dispute. If necessary, use resolution processes as outlined in the contract. Even with clear, specific formal contracts, there are times when a dispute isn’t explicitly covered. In these situations, seeking legal advice may be needed.
Contact Lobb & Plewe for Expert Legal Help!
The goal of any contract is to establish clear expectations between parties and offer protections to all involved. Simple contracts may be good enough in some situations, but formal contracts are necessary in many situations where the agreement is more complex or has higher risk. If there’s part of a contract you don’t understand or you need to create a contract, Lobb & Plewe can provide careful legal guidance. Contact us today for a consultation.
